How to Decarbonize Your Home With the Inflation Reduction Act

What kinds of home improvements are covered by the Inflation Reduction Act?

There’s funding for almost every solution you can think of to make your home more energy efficient and reduce your fossil fuel use, whether you want to install solar panels, insulate your attic, replace your windows, or buy electric appliances. If you need new wiring or an electrical panel upgrade before you can get heat pumps or solar panels, there’s some money available for that, too.

How do the subsidies work, exactly?

The IRA created two types of incentives for home energy efficiency improvements: Unlimited tax credits that will lower the amount you owe when you file your taxes, and $8.8 billion in rebates that function as up-front discounts or post-installation refunds on equipment and services.

The tax credits are available now, but the rebates are not. The latter will be administered by states, which must apply for funding and create programs before the money can go out. The Biden administration began accepting applications at the end of July and expects states to begin rolling out their programs later this year or early next.

Who qualifies for these subsidies?

The home tax credits are available to everyone that owes taxes. The rebates, however, will have income restrictions (more on this later).

How much time do I have to take advantage of this?

“The Inflation Reduction Act is not a limited time offer,” according to Ari Matusiak, the CEO of the nonprofit advocacy group Rewiring America. The rebate programs will only be available until the money runs out, but, again, none of them have started yet. Meanwhile, there’s no limit on how many people can claim the tax credits, and they’ll be available for at least the next decade. That means you don’t need to rush and replace your hot water heater if you have one that works fine. But when it does break down, you’ll have help paying for a replacement.

Should I wait until the rebates are available?

You might want to hold off on buying new appliances or getting insulation — basically any improvements inside your house. There are tax credits available for a lot of this stuff right now, but you’ll likely be able to stack them with rebates in the future.

However, if you’re thinking of installing solar panels on your roof or getting a backup battery system, there’s no need to wait. The rebates will not cover those technologies.

A few other caveats: There’s a good chance your state, city, or utility already offers rebates or other incentives for many of these solutions. Check with your state’s energy office or your utility to find out what’s available. Also, it can take months to get quotes and line up contractors to get this kind of work done. If you want to be ready when the rebates hit, it’s probably a good idea to do some of the legwork now.

Where should I start?

If you do nothing else this year, consider getting a professional home energy audit. This will cost several hundred dollars, depending on where you live, but you’ll be able to get 30% off or up to $150 back under the IRA’s home improvement tax credit. Doing an audit will help you figure out which solutions will give you the biggest bang for your buck, and how to prioritize them once more funding becomes available. The auditor might even be able to explain all of the existing local rebate programs you’re eligible for.

The Internal Revenue Service will allow you to work with any home energy auditor until the end of this year, but beginning in 2024, you must hire an auditor with specific qualifications in order to claim the credit.

Okay, so what else do the tax credits cover?

Let’s start with what’s inside your home. In addition to an energy audit, the Energy Efficiency Home Improvement Credit offers consumers 30% off the cost (after any other subsidies, and excluding labor) of Energy Star-rated windows and doors, insulation, and air sealing.

There’s a maximum amount you can claim for each type of equipment each year:

$600 for windows
$500 for doors
$1,200 for air sealing and insulation

What about heat pumps and wiring?

The Energy Efficiency Home Improvement Credit also covers heat pumps, heat pump water heaters, and electrical panel upgrades, including the cost of installation for those systems. You can get:

$2,000 for heat pumps
$600 for a new electrical panel

Are there any other rules?

Yes, homeowners can only claim up to $3,200 per year under this program until 2032.

Also, one downside to the Energy Efficiency Home Improvement Credit is that it does not carry over. If you spend enough on efficiency to qualify for the full $3,200 in a given year, but you only owe the federal government $2,000 for the year, your bill will go to zero and you will miss out on the remaining $1,200 credit. So it could be worth your while to spread the work out.

What if I want to get rooftop solar?

The other big consumer-oriented tax credit, the Residential Clean Energy Credit, offers homeowners 30% off the cost of solar panels and solar water heaters. It also covers battery systems, which store energy from the grid or from your solar panels that you can use when there’s a blackout, or sell back to your utility when the grid needs more power.

The subsidy has no limits, so if you spend $35,000 on solar panels and battery storage, including labor, you’ll be eligible for the full 30% refund, or $10,500. The credit can also be rolled over, so if your tax liability that year is only $5,000, you’ll be able to claim more of it the following year, and continue doing so until you’ve received the full value.

What about geothermal heating?

Geothermal heating systems are also covered under this credit. (Geothermal heat pumps work similarly to regular heat pumps, but they use the ground as a source and sink for heat, rather than the ambient air.)

Do I dare ask about rebates?

Here’s what we know right now. The IRA funded two rebate programs. One, known as the Home Energy Performance-Based Whole House Rebates, will provide discounts to homeowners and landlords based on the amount of energy a home upgrade is predicted to save.

Congress did not specify which energy-saving measures qualify — that’s something state energy offices will decide when they design their programs. But it did cap the total amount each household could receive, based on income. For example, if your household earns under 80% of the area median income, and you make improvements that cut your energy use by 35%, you’ll be eligible for up to $8,000. If your household earns more than that, you can get up to $4,000.

What about the other program?

There’s also the High-Efficiency Electric Home Rebate Program, which will provide discounts on specific electric appliances like heat pumps, an induction stove, and an electric clothes dryer, as well as a new electrical panel and wiring. Individual households can get up to $14,000 in discounts under this program, although there are caps on how much is available for each piece of equipment. This money will only be available to low- and moderate-income households, or those earning under 150% of the area median income.

What should I do if I’m a renter?

Renters with a household income below 150% of the area median income qualify for rebates on appliances that they should be able to install without permission from their landlords, and that they can take with them if they move. For example, portable appliances like tabletop induction burners, clothes dryers, and window-unit heat pumps are all eligible for rebates.

It’s also worth noting that there is a lot of funding available for multifamily building owners. If you have a good relationship with your landlord, you might want to talk to them about the opportunity to make lasting investments in their property. Under the performance-based rebates program, apartment building owners can get up to $400,000 for energy efficiency projects.

These improvements will probably still cost me something. Will I save on my energy bills?

For the most part, yes. But the calculus gets tricky when it comes to heat pumps.

Experts generally agree that no matter where you live, switching from an oil or propane-burning heating system or electric resistance heaters to heat pumps will lower your energy bills. Not so if you’re switching over from natural gas.

Electric heat pumps are three to four times more efficient than natural gas heating systems, but electricity is so much more expensive than gas in some parts of the country that switching from gas to a heat pump can increase your overall bills a bit. Especially if you also electrify your water heater, stove, and clothes dryer.

That being said, Rewiring America estimates that switching from gas to a heat pump will lower bills for about 60% of households. Many utilities offer tools that will help you calculate your bills if you make the switch.

The good news is that all the measures I’ve discussed in this article are expected to cut carbon emissions and pollution, even if most of your region’s electricity still comes from fossil fuels. For some, that might be worth the monthly premium.

Can you just give me a quick rundown of these programs?

Tax Credit #1 offers 30% off the cost of energy audits, windows, doors, insulation, air sealing, heat pumps, electrical panels, with a $3200-per-year allowance and individual item limits.

Tax Credit #2 offers 30% off the cost of solar panels, solar water heaters, batteries, and geothermal heating systems.

Rebate Program #1 will offer discounts on whole-home efficiency upgrades depending on how much they reduce your energy use, with an $8,000 cap for lower-income families and a $4,000 cap for everyone else.

Rebate Program #2 is only for low- and moderate- income households, and will offer discounts on specific electric appliances, with a $14,000 cap.